FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Quarterly Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1999
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
------ to -------.
Commission File Number: 0-16195
II-VI INCORPORATED
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1214948
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
375 Saxonburg Boulevard
Saxonburg, PA 16056
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 724-352-4455
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date:
At November 5, 1999, 6,351,586 shares of Common Stock, no
par value, of the registrant were outstanding.
1
<PAGE>
II-VI INCORPORATED AND SUBSIDIARIES
INDEX
Page No.
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets --
September 30, 1999 and June 30, 1999 . . . . . . . . . . . . 3
Condensed Consolidated Statements of Earnings
- -- Three months ended September 30, 1999 and 1998. . . . . . 4
Condensed Consolidated Statements of Cash
Flows -- Three months ended September 30, 1999 and 1998. . . 5
Notes to Condensed Consolidated Financial Statements . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . .10
Item 3. Quantitative and Qualitative Disclosures
about Market Risk (no significant changes
since June 30, 1999)
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . .12
2
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements:
II-VI Incorporated and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
($000)
<TABLE>
<CAPTION>
September 30, June 30,
Assets 1999 1999
------------- --------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 6,895 $ 5,558
Accounts receivable - net 11,873 13,070
Inventories 10,256 9,096
Other current assets 1,489 1,289
--------- ---------
Total Current Assets 30,513 29,013
Property, Plant and Equipment, net 36,908 36,955
Other Assets 7,890 4,875
--------- ---------
$ 75,311 $ 70,843
========= =========
Liabilities and Shareholders' Equity
Current Liabilities
Notes payable $ 6,523 $ 4,082
Accounts payable 1,768 1,934
Accrued salaries, wages and bonuses 2,180 2,836
Income taxes payable 867 367
Accrued profit sharing contribution 181 580
Other current liabilities 1,264 1,581
Current portion of long-term debt 43 43
--------- ---------
Total Current Liabilities 12,826 11,423
Long-Term Debt--less current portion 2,783 2,549
Other Liabilities,
primarily deferred income taxes 2,750 2,378
Commitments & Contingencies - -
Shareholders' Equity
Preferred stock, no par value;
authorized - 5,000,000 shares; unissued - -
Common stock, no par value;
authorized - 30,000,000 shares; issued
- 6,885,226 shares at
September 30, 1999; 6,875,766 shares
at June 30, 1999 18,808 18,746
Accumulated other comprehensive income 930 272
Retained earnings 39,124 37,385
--------- ---------
58,862 56,403
Less treasury stock, at cost -
534,440 shares at September 30, 1999
and June 30, 1999 1,910 1,910
--------- ---------
56,952 54,493
--------- ---------
$ 75,311 $ 70,843
========= =========
</TABLE>
- -See notes to condensed consolidated financial statements.
3
<PAGE>
II-VI Incorporated and Subsidiaries
Condensed Consolidated Statements of Earnings (Unaudited)
($000 except per share data)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
-------- --------
<S> <C> <C>
Revenues
Net sales:
Domestic $ 8,536 $ 7,665
International 7,586 5,829
-------- --------
16,122 13,494
Contract research and development 76 299
-------- --------
16,198 13,793
Costs, Expenses & Other Expense (Income)
Cost of goods sold 9,228 8,969
Contract research and development 58 235
Internal research and development 623 578
Selling, general and administrative 3,806 3,007
Interest expense 85 126
Other expense (income) - net (72) (19)
-------- --------
13,728 12,896
-------- --------
Earnings Before Income Taxes 2,470 897
Income Taxes 731 268
-------- --------
Net Earnings $ 1,739 $ 629
======== ========
Basic Earnings Per Share $ 0.27 $ 0.10
======== ========
Diluted Earnings Per Share $ 0.27 $ 0.10
======== ========
</TABLE>
- -See notes to condensed consolidated financial statements.
4
<PAGE>
II-VI Incorporated and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
($000)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities
Net earnings $ 1,739 $ 629
Adjustments to reconcile net earnings
to net cash
Provided by (used in)
operating activities:
Depreciation and amortization 1,402 1,200
Loss on foreign currency transactions (10) (90)
Deferred income taxes (8) -
Increase (decrease) in cash
from changes in:
Accounts receivable 1,381 434
Inventories (1,022) (131)
Accounts payable (308) (1,506)
Other operating net assets (1,163) (2,369)
-------- --------
Net cash provided by (used in)
operating activities 2,011 (1,833)
-------- --------
Cash Flows from Investing Activities
Additions to property,
plant and equipment (1,280) (1,719)
Investments in unconsolidated
businesses (2,788) -
Disposals of other assets 750 -
-------- --------
Net cash used in investing activities (3,318) (1,719)
-------- --------
Cash Flows from Financing Activities
Proceeds on short-term borrowings, net 2,432 1,397
Payments on long-term borrowings (25) (13)
Proceeds from sale of common stock 35 84
Purchases of treasury stock - (452)
-------- --------
Net cash provided by
financing activities 2,442 1,016
Effect of exchange rate changes on cash
and cash equivalents 202 139
-------- --------
Net increase (decrease) in cash and
cash equivalents 1,337 (2,397)
Cash and Cash Equivalents at
Beginning of Period 5,558 4,160
-------- --------
Cash and Cash Equivalents at
End of Period $ 6,895 $1,763
======== ========
</TABLE>
- -See notes to condensed consolidated financial statements.
5
<PAGE>
II-VI Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note A - Basis of Presentation
The consolidated financial statements for the three month periods
ended September 30, 1999 and 1998 are unaudited. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation for the periods
presented have been included. These interim statements should be read
in conjunction with the audited consolidated financial statements and
footnotes thereto contained in the Company's 1999 Annual Report to
shareholders. The consolidated results of operations for the three
month periods ended September 30, 1999 and 1998 are not necessarily
indicative of the results to be expected for the full year. Certain
reclassifications were made to the prior period financial statements
in order for them to be in conformity with current period
presentation.
Note B - Inventories ($000)
The components of inventories are as follows:
September 30, June 30,
1999 1999
------------- --------
Raw materials $ 2,576 $ 3,014
Work in progress 4,497 3,731
Finished goods 3,183 2,351
------------- --------
$10,256 $ 9,096
============= ========
Note C - Property, Plant and Equipment ($000)
Property, plant and equipment (at cost) consist of the following:
September 30, June 30,
1999 1999
------------- --------
Land and land improvements $ 1,501 $ 1,501
Buildings and improvements 19,709 19,559
Machinery and equipment 41,888 40,758
------------- --------
63,098 61,818
Less accumulated depreciation 26,190 24,863
------------- --------
$36,908 $36,955
============= ========
6
<PAGE>
II-VI Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
Note D - Debt
On March 26, 1999, the Company entered into a $15.0 million unsecured
line of credit agreement with PNC Bank that expires on March 25,
2000. This line of credit may be extended upon the mutual agreement
of the Company and PNC Bank for an additional two years. The average
interest rate in effect as of September 30, 1999 was 6.25%. As of
September 30, 1999, the total borrowings under this line of credit
were $6.5 million. The Company is subject to certain restrictive
covenants under this agreement.
Note E - Earnings Per Share
The following table sets forth the computation of earnings per share
for the periods indicated:
Three Months Ended September 30,
(000 except per share data) 1999 1998
- -------------------------------------------------------------------
Net earnings $1,739 $ 629
Divided by:
Weighted average shares 6,347 6,444
- -------------------------------------------------------------------
Basic earnings per share $0.27 $0.10
Net earnings $1,739 $ 629
Divided by:
Weighted average shares 6,347 6,444
Dilutive effect of
common stock equivalents 159 159
- -------------------------------------------------------------------
Diluted weighted average
common shares 6,506 6,603
- -------------------------------------------------------------------
Diluted earnings per share $0.27 $0.10
- -------------------------------------------------------------------
Note F - Other Comprehensive Income
During the quarter ended September 30, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" which requires the Company to report and
disclose a measure ("comprehensive income") of all changes in
shareholders' equity that result from transactions and other economic
events of the period other than transactions with owners.
The changes to accumulated other comprehensive income were as follows
for the periods indicated ($000):
Three Months Ended September 30, 1999
------------------------------------------
Foreign Unrealized Accumulated Other
Currency Gains on Comprehensive
Items Securities Income
-------- ---------- -----------------
Beginning balance,
July 1, 1999 272 - 272
Changes during
the period (27) 685 658
-------- ---------- -----------------
Ending balance,
September 30, 1999 245 685 930
7
<PAGE>
II-VI Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
Note F - Other Comprehensive Income Cont'd.
Three Months Ended September 30, 1998
------------------------------------------
Foreign Unrealized Accumulated Other
Currency Gains on Comprehensive
Items Securities Income
-------- ---------- -----------------
Beginning balance,
July 1, 1998 435 - 435
Changes during
the period (123) - (123)
-------- ---------- -----------------
Ending balance,
September 30, 1998 312 - 312
Note G - Segment Reporting
Effective in fiscal 1999, the Company adopted Statement of Financial
Accounting standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" (SFAS No. 131), which requires
the use of the 'management approach' model for segment reporting.
The Company has two reportable segments: Optical Components, which
is an aggregation of the Company's infrared optics and material
products business and the Company's VLOC subsidiary under the
guidelines of SFAS No. 131, and Radiation Detectors.
The accounting policies of the segments are the same as those of the
Company. Substantially all of the Company's corporate expenses are
allocated to the segments. The Company evaluates segment performance
based upon reported segment profit or loss from operations. Inter-
segment sales and transfers are insignificant.
The following table summarizes selected financial information of the
Company's operations by segment ($000's):
Three Months Ended September 30, 1999
------------------------------------------
Optical Radiation
Components Detectors Totals
------------------------------------------
Net revenues $14,841 $1,357 $16,198
Income (loss) from
operations 2,855 (372) 2,483
Interest expense - - 85
Other income, net - - (72)
Earnings before income taxes - - 2,470
Segment assets 66,946 8,365 75,311
8
<PAGE>
II-VI Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
Note G - Segment Reporting Cont'd.
Three Months Ended September 30, 1998
------------------------------------------
Optical Radiation
Components Detectors Totals
------------------------------------------
Net revenues $12,499 $1,294 $13,793
Income (loss) from
operations 1,290 (286) 1,004
Interest expense - - 126
Other income, net - - (19)
Earnings before income taxes - - 897
Segment assets 56,279 9,295 65,574
Note H - Investment in Laser Power Corporation
On September 21, 1999, the Company purchased 1,250,000 shares of
Laser Power Corporation common stock for a total purchase price of
approximately $2.8 million. Based on information available to the
Company, this purchase represents approximately 14.7% of the
outstanding common stock of Laser Power Corporation. Laser Power
Corporation is a competitor of the Company which produces infrared
and CO2 laser optics.
This investment is being accounted for under the cost method of
accounting. This investment is included in "Other Assets" in the
accompanying condensed consolidated balance sheet as of September 30,
1999.
9
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net earnings for the first quarter of fiscal 2000 were $1,739,000
($0.27 per share-diluted) on revenues of $16,198,000. This compares
to net earnings of $629,000 ($0.10 per share-diluted) on revenues of
$13,793,000 in the first quarter of fiscal 1999.
Order bookings for the first quarter of fiscal 1999 were $16,832,000
compared to $12,812,000 for the same period last fiscal year, an
increase of 31%. There were no bookings for contract research and
development for the first quarter of fiscal year 2000 or 1999.
Bookings for laser optics and component products increased
approximately 40% while bookings of the eV PRODUCTS division
decreased by nearly 30%.
Revenues for the first quarter of fiscal 2000 increased 17% to
$16,198,000 compared to $13,793,000 for the same period last fiscal
year. Revenues from laser optics and products increased by
approximately 20% while revenues from the eV PRODUCTS division
increased by approximately 5%.
Manufacturing gross margin for the first quarter of fiscal 2000 was
$6,894,000 or 43% of revenues compared to $4,525,000 or 34% of
revenues for the same period last fiscal year. The higher gross
margin percentage for the quarter reflects the productivity gains and
cost control programs of all operating entities, lower per unit cost
associated with higher production volume for laser optics and
component products and a strengthened Japanese Yen.
Company-funded internal research and development expenses for the
first quarter of fiscal 2000 were $623,000 or 4% of revenues compared
to $578,000 or 4% of revenues for the same period last year. The
increased expenses for the quarter reflect projects associated with
nuclear radiation detector development and infrared optics and
materials development.
Selling, general and administrative expenses for the first quarter of
fiscal 2000 were $3,806,000 or 23% of revenues compared to $3,007,000
or 22% of revenues for the same period last year. The dollar and
percentage increases are attributable to increased compensation
expense associated with the Company's worldwide profit-driven bonus
programs and increased professional service expenses.
Interest expense for the first quarter of fiscal 2000 was $85,000
compared to $126,000 for the same period last year. This fluctuation
is the direct result of decreased average borrowings.
The Company's first quarter fiscal 2000 and first quarter fiscal 1999
effective income tax rate was 30%, respectively.
Liquidity and Capital Resources
Cash increased during the first three months of fiscal 2000 by
$1,337,000 primarily due to net earnings before depreciation and
amortization of $3,141,000, a reduction in accounts receivable and
borrowings on the Company's line of credit. These items were offset
by an increase in inventory, payment of compensation costs relating
to the Company's fiscal 1999 worldwide profit-driven bonus programs,
capital expenditures and the purchase of 1,250,000 shares of Laser
Power Corporation common stock. The Company generated $2,011,000 in
cash from operations during the first three months of fiscal 2000.
The Company believes internally generated funds, existing cash
reserves and available borrowing capacity will be sufficient to fund
its working capital needs, capital expenditures and scheduled debt
payments for fiscal 2000.
10
<PAGE>
This Management's Discussion and Analysis contains forward looking
statements as defined by Section 21E of the Securities Exchange Act
of 1934, as amended, including the statements regarding the Company's
ability to fund future working capital needs, capital expenditures
and scheduled debt payments and the Company's plan to address the
Year 2000 issue. Forward-looking statements are also identified by
words such as "expects," "anticipates," "intends," "plans,"
"projects" or similar expressions.
Actual results could materially differ from such statements if
worldwide economic conditions change, competitive conditions
intensify, and/or technology problems emerge. There are additional
risk factors that could affect the Company's business, results of
operations or financial condition. Investors are encouraged to
review the risk factors set forth in the Company's 1999 Form 10-K as
filed with the Securities and Exchange Commission on September 28,
1999.
Other Matters
The "Year 2000" issue concerns the potential exposures related to the
automated generation of business and financial misinformation
resulting from the use of computer programs which have been written
using two digits, rather than four, to define the applicable year of
business transactions.
The Company has developed a formal plan to address the Year 2000
implications of its information technology and noninformation
technology systems, which consisted of three phases. The first phase
of this plan is complete and consisted of an evaluation of the
systems impacted by the Year 2000 issue. The second phase is
complete and consisted of an evaluation of the third parties with
whom the Company has significant relationships and their Year 2000
compliance. The last phase of this plan is substantially complete
and consisted of the implementation of corrective measures deemed
necessary, as identified during the first two stages of the plan.
Based upon information obtained during the execution of the plan, the
Company does not believe its information technology and
noninformation technology systems will experience significant Year
2000 problems. However, there can be no assurances that the third
parties with whom the Company has significant relationships will not
experience disruptions in their business that could have a material
adverse effect on the Company. An example of a worst case scenario
caused by the Year 2000 issue would be the failure in the accounting
systems of a significant number of the Company's key customers which
resulted in a delay in the payment of invoices issued by the Company.
To date, the Company has spent approximately $160,000 on the Year
2000 issue and believes that the remaining potential cost related to
the Year 2000 issue will be insignificant.
Although the Company has developed and executed the plan described
above, due to the inherent uncertainty and complexity involved with
the Year 2000 issue, there can be no assurance that the Company will
address all aspects of the Year 2000 issue. The Company assessed
needs and developed a contingency plan as part of its Year 2000 plan
The contingency plan incorporates necessary actions that may be needed
to contend with such occurrences as disruptions of electrical and
water service, temporary loss of critical business information
systems, and similar potential business interruptions.
11
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
--------------------------------
(a) Exhibits.
--------
27.01 Financial Data Schedule . . . Filed herewith.
(b) Reports on Form 8-K.
On July 7, 1999, the registrant filed a report on
Form 8-K for the events dated July 7, 1999,
covering Items 5 and 7 thereof.
On October 21, 1999, the registrant filed a report
on Form 8-K for the events dated October 19, 1999,
covering Items 5 and 7 thereof.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
II-VI INCORPORATED
(Registrant)
Date: November 12, 1999 By: /s/ Carl J. Johnson
Carl J. Johnson
Chairman and Chief Executive Officer
Date: November 12, 1999 By: /s/ James Martinelli
James Martinelli
Treasurer & Chief Financial Officer
13
<PAGE>
EXHIBIT INDEX
Exhibit No.
27.01 Financial Data Schedule. . . . . . . . . .Filed herewith.
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> JUN-30-2000 JUN-30-1999
<PERIOD-START> JUL-01-1999 JUL-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 6,895 1,763
<SECURITIES> 0 0
<RECEIVABLES> 12,345 10,907
<ALLOWANCES> 472 308
<INVENTORY> 10,256 10,234
<CURRENT-ASSETS> 30,513 24,519
<PP&E> 63,098 58,151
<DEPRECIATION> 26,190 21,670
<TOTAL-ASSETS> 75,311 65,574
<CURRENT-LIABILITIES> 12,826 11,371
<BONDS> 2,783 2,391
0 0
0 0
<COMMON> 18,808 18,572
<OTHER-SE> 38,144 31,649
<TOTAL-LIABILITY-AND-EQUITY> 75,311 65,574
<SALES> 16,198 13,793
<TOTAL-REVENUES> 16,198 13,793
<CGS> 9,286 9,204
<TOTAL-COSTS> 9,286 9,204
<OTHER-EXPENSES> 4,357 3,566
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 85 126
<INCOME-PRETAX> 2,470 897
<INCOME-TAX> 731 268
<INCOME-CONTINUING> 1,739 629
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,739 629
<EPS-BASIC> 0.27 0.10
<EPS-DILUTED> 0.27 0.10
</TABLE>
